CYANAMID VS COURT OF APPEALS

FACTS: Version 1 -- Petitioner, Cyanamid Philippines, Inc., is a

corporation engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods,
and an importer/indentor. The CIR sent an assessment letter to
petitioner Cyanamid Phil., Inc. and demanded the payment of
deficiency income tax for 1981. Petitioner then protested the
assessments, particularly, (1) the 25% Surtax Assessment; (2) the
1981 Deficiency Income Assessment; and (3) the 1981 Deficiency
Percentage Assessment. Petitioner claimed that the surtax for
the undue accumulation of earnings was not proper because the
said profits were retained to increase petitioners working capital
and it would be used for reasonable business needs of the
company. The CIR, however, refused to allow the cancellation
of the assessment notices. Petitioner appealed to the CTA.
During the pendency of the case, both parties agreed to
compromise the 1981 Deficiency Income Assessment. However,
the surtax on improperly accumulated profits remained
unresolved.
Version 2-- Petitioner is a corporation organized under
Philippine laws and is a wholly owned subsidiary of American
Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods and an imported/indentor.
In 1985 the CIR assessed on petitioner a deficiency income tax of
P119,817) for the year 1981. Cyanamid protested the assessments
particularly the 25% surtax for undue accumulation of earnings.
It claimed that said profits were retained to increase petitioners
working capital and it would be used for reasonable business
needs of the company. The CIR refused to allow the cancellation
of the assessments, petitioner appealed to the CTA. It claimed
that there was not legal basis for the assessment because 1) it
accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of
indebtedness 2) it is a wholly owned subsidiary of American
Cyanamid Company, a foreign corporation, and its shares are
listed and traded in the NY Stock Exchange. The CTA denied the
petition stating that the law permits corporations to set aside a
portion of its retained earnings for specified purposes under Sec.
43 of the Corporation Code but that petitioners purpose did not
fall within such purposes. It found that there was no need to set
aside such retained earnings as working capital as it had
considerable liquid funds. Those corporations exempted from the
accumulated earnings tax are found under Sec. 25 of the NIRC,
and that the petitioner is not among those exempted. The CA
affirmed the CTAs decision.
ISSUE: Is a manufacturing company liable for the accumulated
earnings tax, despite its claim that earnings were accumulated to

increase working capital and to be used for its reasonable needs,

if it fails to present evidence to prove such allegations? Y
RULING: Taxation; Income Tax; Accumulated Earnings Tax;
Corporation Law; The tax on improper accumulation of surplus
is essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders
could, in turn, be taxed.The provision discouraged tax
avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid
on the undeclared dividends received by the shareholders. The tax
on improper accumulation of surplus is essentially a penalty tax
designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed.
Same; Same; Same; Statutory Construction; Laws granting
exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power.The
amendatory provision of Section 25 of the 1977 NIRC, which
was PD 1739, enumerated the corporations exempt from the
imposition of improperly accumulated tax: (a) banks; (b) nonbank financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central
Bank of the Philippines to hold shares of stocks of banks.
Petitioner does not fall among those exempt classes. Besides, the
rule on enumeration is that the express mention of one person,
thing, act, or consequence is construed to exclude all others.
Laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The
burden of proof rests upon the party claiming exemption to prove
that it is, in fact, covered by the exemption so claimed, a burden
which petitioner here has failed to discharge.
Same; Same; Same; Words and Phrases; Bardahl Formula and
Operating Cycle, Explained.Another point raised by the
petitioner in objecting to the assessment, is that increase of
working capital by a corporation justifies accumulating income.
Petitioner asserts that respondent court erred in concluding that
Cyanamid need not infuse additional working capital reserve
because it had considerable liquid funds based on the 2.21:1 ratio
of current assets to current liabilities. Petitioner relies on the socalled Bardahl formula, which allowed retention, as working
capital reserve, sufficient amounts of liquid assets to carry the
company through one operating cycle. The Bardahl formula
was developed to measure corporate liquidity. The formula
requires an examination of whether the taxpayer has sufficient
liquid assets to pay all of its current liabilities and any
extraordinary expenses reasonably anticipated, plus enough to
operate the business during one operating cycle. Operating cycle

is the period of time it takes to convert cash into raw materials,

raw materials into inventory, and inventory into sales, including
the time it takes to collect payment for the sales.
Same; Same; Same; As stressed by American authorities,
although the Bardahl formula is well-established and routinely
applied by the courts, it is not a precise ruleit is used only for
administrative convenience.We note, however, that the
companies where the Bardahl formula was applied, had
operating cycles much shorter than that of petitioner. In Atlas
Tool Co., Inc. vs. CIR, the companys operating cycle was only
3.33 months or 27.75% of the year. In Cataphote Corp. of
Mississippi vs. United States, the corporations operating cycle
was only 56.87 days, or 15.58% of the year. In the case of
Cyanamid, the operating cycle was 288.35 days, or 78.55% of a
year, reflecting that petitioner will need sufficient liquid funds,
of at least three quarters of the year, to cover the operating costs
of the business. There are variations in the application of the
Bardahl formula, such as average operating cycle or peak
operating cycle. In times when there is no recurrence of a
business cycle, the working capital needs cannot be predicted
with accuracy. As stressed by American authorities, although the
Bardahl formula is well-established and routinely applied by
the courts, it is not a precise rule. It is used only for
administrative convenience. Petitioners application of the
Bardahl formula merely creates a false illusion of exactitude.
Same; Same; Same; The ratio of current assets to current
liabilities is used to determine the sufficiency of working
capital.Other formulas are also used, e.g. the ratio of current
assets to current liabilities and the adoption of the industry
standard. The ratio of current assets to current liabilities is used
to determine the sufficiency of working capital. Ideally, the
working capital should equal the current liabilities and there
must be 2 units of current assets for every unit of current
liability, hence the so-called 2 to 1 rule.
Same; Same; Same; In order to determine whether profits are
accumulated for the reasonable needs of the business to avoid the
surtax upon shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of
accumulation, not intentions declared subsequently, which are
mere afterthoughts.If the CIR determined that the
corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested
such a determination, the burden of proving the determination
wrong, together with the corresponding burden of first going
forward with evidence, is on the taxpayer. This applies even if
the corporation is not a mere holding or investment company and
does not have an unreasonable accumulation of earnings or
profits. In order to determine whether profits are accumulated

for the reasonable needs of the business to avoid the surtax upon
shareholders, it must be shown that the controlling intention of
the taxpayer is manifested at the time of accumulation, not
intentions declared subsequently, which are mere afterthoughts.
Same; Same; Same; Words and Phrases; Immediacy Test,
Explained.The accumulated profits must be used within a
reasonable time after the close of the taxable year. In the instant
case, petitioner did not establish, by clear and convincing
evidence, that such accumulation of profit was for the immediate
needs of the business. In Manila Wine Merchants, Inc. vs.
Commissioner of Internal Revenue, we ruled: To determine the
reasonable needs of the business in order to justify an
accumulation of earnings, the Courts of the United States have
invented the so-called Immediacy Test which construed the
words reasonable needs of the business to mean the immediate
needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the
accumulation of the earnings and profits, the accumulation was
not for the reasonable needs of the business, and the penalty tax
would apply. (Mertens, Law of Federal Income Taxation, Vol.
7, Chapter 39, p. 103).
Same; Same; Same; Courts; The Supreme Court will not set aside
lightly the conclusion reached by the Court of Tax Appeals
which, by the very nature of its function, is dedicated exclusively
to the consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an
abuse or improvident exercise of authority.The Tax Court
opted to determine the working capital sufficiency by using the
ratio between current assets to current liabilities. The working
capital needs of a business depend upon the nature of the
business, its credit policies, the amount of inventories, the rate of
turnover, the amount of accounts receivable, the collection rate,
the availability of credit to the business, and similar factors.
Petitioner, by adhering to the Bardahl formula, failed to
impress the tax court with the required definiteness envisioned by
the statute. We agree with the tax court that the burden of proof
to establish that the profits accumulated were not beyond the
reasonable needs of the company, remained on the taxpayer. This
Court will not set aside lightly the conclusion reached by the
Court of Tax Appeals which, by the very nature of its function,
is dedicated exclusively to the consideration of tax problems and
has necessarily developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority. Unless
rebutted, all presumptions generally are indulged in favor of the
correctness of the CIRs assessment against the taxpayer. With
petitioners failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the correctness
of tax courts ruling as affirmed by the Court of Appeals.

SY PO VS CTA
FACTS: Bonifacio Sy Po is the widow of the late Po Bien Sing,
(who died on 7 September 1980). In the taxable years 1964 to
1972, the deceased Po Bien Sing was the sole proprietor of Silver
Cup Wine Factory (Talisay, Cebu), and was engaged in the
business of manufacture and sale of compounded liquors, using
alcohol and other ingredients as raw materials. On the basis of a
denunciation against Silver Cup, the Secretary of Finance
directed the Finance-BIR-NBI team to investigate. Silver Cup
was required to produce accounting records and other related
documents for the examination of the team. Po Bien Sing failed
to do so. This prompted the team to enter the factory bodega of
Silver Cup and seize different brands, consisting of 1,555 cases
of alcohol products. On the basis of the teams report of
investigation, the Commissioner assessed Po Bien Sing deficiency
income tax for 1966 to 1970 in thhe amount of P7,154,685.16
and for deficiency specific tax for 2 January 1964 to 19 January
1972 in the amount of P5,595,003.68. Po Bien Sing protested
the assessment.
ISSUE: Whether the assessment have valid and legal bases.
RULING: Taxation; Court of Tax Appeals; Factual findings of
the Court of Tax Appeals are binding upon the Supreme Court,
and can only be disturbed on appeal if not supported by
substantial evidence.Settled is the rule that the factual
findings of the Court of Tax Appeals are binding upon this
Honorable Court and can only be disturbed on appeal if not
supported by substantial evidence.
Same; Same; Rule on the best evidence obtainable, when
applicable.The law is specific and clear. The rule on the best
evidence obtainable applies when a tax report required by law
for the purpose of assessment is not available or when the tax
report is incomplete or fraudulent.
Same; Same; The failure of the taxpayers to present their books
of accounts for examination for taxable years compelled the
Commissioner of Internal Revenue to resort to the power
conferred on him under the Tax Code.In the instant case, the
persistent failure of the late Po Bien Sing and the herein
petitioner to present their books of accounts for examination for
the taxable years involved left the Commissioner of Internal
Revenue no other legal option except to resort to the power
conferred upon him under Section 16 of the Tax Code.
Same; Same; Tax assessments; Presumption in favor of the
correctness of tax assessments.Tax assessments by tax
examiners are presumed correct and made in good faith. The

taxpayer has the duty to prove otherwise. In the absence of proof

of any irregularities in the performance of duties, an assessment
duly made by a Bureau of Internal Revenue examiner and
approved by his superior officers will not be disturbed. All
presumptions are in favor of the correctness of tax assessments.
Same; Same; Same; Fraudulent acts attributed to the taxpayer
had not been satisfactorily rebutted.On the whole, we find
that the fraudulent acts detailed in the decision under review
had not been satisfactorily rebutted by the petitioner. There are
indeed clear indications on the part of the taxpayer to deprive the
Goverment of the taxes due.
Same; Same; Same; Same; The existence of fraud cannot be set
aside absent substantial evidence to counteract the finding of
fraud.The existence of fraud as found by the respondents can
not be lightly set aside absent substantial evidence presented by
the petitioner to counteract such finding. The findings of fact of
the respondent Court of Tax Appeals are entitled to the highest
respect. We do not find anything in the questioned decision that
should disturb this long-established doctrine. [Sy Po vs. Court of
Tax Appeals, 164 SCRA 524(1988)]

CIR VS. PASCOR REALITY & DEVT CORP.

FACTS: BIR Commissioner authorized revenue officers to
examined the books of accounts and accounting records of Pascor
Realty (PRDC). Such examination resulted in a recommendation
for the issuance of an assessment amounting to P7,498,434.65
and P3,015,236.35 for the years 1986 and 1987, respectively.
Commissioner of Internal Revenue filed a criminal complaint
before the Department of Justice against the PRDC, its
President Rogelio A. Dio, and its Treasurer Virginia S. Dio,
alleging evasion of taxes in the total amount of P10,513,671.00.
Pascor filed a request for reconsideration/reinvestigation which
the CIR denied prompting the respondents to elevate the CIRs
decision to the CTA. CIR filed a Motion to Dismiss on the
ground that CTA has no jurisdiction over the subject matter since
no formal assessment has been issued against PRDC. The CTA
denied the Motion stating that the criminal case for tax evasion
is already an assessment. The amount and kind of tax due and
the covered period are sufficient details for an assessment. CA
agreed with the decision of the CTA.
ISSUE: Whether or not the criminal complaint for tax evasion
can be construed as an assessment.
RULING: Courts; Taxation; National Internal Revenue Code;
Section 203 of the NIRC provides that internal revenue taxes
must be assessed within three years from the last day within
which to file the return.The issuance of an assessment is vital
in determining the period of limitation regarding its proper
issuance and the period within which to protest it. Section 203
of the NIRC provides that internal revenue taxes must be
assessed within three years from the last day within which to file
the return. Section 222, on the other hand, specifies a period of
ten years in case a fraudulent return with intent to evade was
submitted or in case of failure to file a return. Also, Section 228
of the same law states that said assessment may be protested
only within thirty days from receipt thereof. Necessarily, the
taxpayer must be certain that a specific document constitutes an
assessment. Otherwise, confusion would arise regarding the
period within which to make an assessment or to protest the
same, or whether interest and penalty may accrue thereon.
Same; Same; Same; Assessment is deemed made only when the
collector of internal revenue releases, mails or sends such notice
to the taxpayer.It should also be stressed that the said
document is a notice duly sent to the taxpayer. Indeed, an
assessment is deemed made only when the collector of internal
revenue releases, mails or sends such notice to the taxpayer. In
the present case, the revenue officers Affidavit merely contained
a computation of respondents tax liability. It did not state a

demand or a period for payment. Worse, it was addressed to the

justice secretary, not to the taxpayers.
Same; Same; Same; Section 222 of the NIRC specifically states
that in cases of failure to file a return, proceedings in court may
be commenced without an assessment.Private respondents
maintain that the filing of a criminal complaint must be preceded
by an assessment. This is incorrect, because Section 222 of the
NIRC specifically states that in cases where a false or fraudulent
return is submitted or in cases of failure to file a return such as
this case, proceedings in court may be commenced without an
assessment. Furthermore, Section 205 of the same Code clearly
mandates that the civil and criminal aspects of the case may be
pursued simultaneously. In Ungab v. Cusi, petitioner therein
sought the dismissal of the criminal Complaints for being
premature, since his protest to the CTA had not yet been
resolved. The Court held that such protests could not stop or
suspend the criminal action which was independent of the
resolution of the protest in the CTA. This was because the
commissioner of internal revenue had, in such tax evasion cases,
discretion on whether to issue an assessment or to file a criminal
case against the taxpayer or to do both.
Same; Same; Same; Section 222 states that an assessment is not
necessary before a criminal charge can be filed.Private
respondents insist that Section 222 should be read in relation to
Section 255 of the NIRC, which penalizes failure to file a
return. They add that a tax assessment should precede a criminal
indictment. We disagree. To reiterate, said Section 222 states
that an assessment is not necessary before a criminal charge can
be filed. This is the general rule. Private respondents failed to
show that they are entitled to an exception. Moreover, the
criminal charge need only be supported by a prima facie showing
of failure to file a required return. This fact need not be proven
by an assessment.
Same; Same; Same; A criminal complaint is instituted not to
demand payment, but to penalize the taxpayer for violation of
the Tax Code.The issuance of an assessment must be
distinguished from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assessment notice
sent to the taxpayer. The taxpayer is then given a chance to
submit position papers and documents to prove that the
assessment is unwarranted. If the commissioner is unsatisfied, an
assessment signed by him or her is then sent to the taxpayer
informing the latter specifically and clearly that an assessment
has been made against him or her. In contrast, the criminal
charge need not go through all these. The criminal charge is filed
directly with the DOJ. Thereafter, the taxpayer is notified that a
criminal case had been filed against him, not that the

commissioner has issued an assessment. It must be stressed that a

criminal complaint is instituted not to demand payment, but to
penalize the taxpayer for violation of the Tax Code.
[Commissioner of Internal Revenue vs. Pascor Realtyand
Development Corporation, 309 SCRA 402(1999)

UNGOB VS CUSI
FACTS: BIR Examiner Ben Garcia examined the income tax
returns filed by Quirico P. Ungab, for the calendar year ending
December 31, 1973. In the course of his examination, he
discovered that the petitioner failed to report his income derived
from sales of banana saplings. As a result, the BIR District
Revenue Officer at Davao City sent a "Notice of Taxpayer" to the
petitioner informing him that there is due from him (Ungab) the
amount of P104,980.81, representing income, business tax and
forest charges for the year 1973 and inviting petitioner to an
informal conference where the petitioner, duly assisted by
counsel, may present his objections to the findings of the BIR
Examiner. Upon receipt of the notice, the petitioner wrote the
BIR District Revenue Officer protesting the assessment,
claiming that he was only a dealer or agent on commission basis
in the banana sapling business and that his income. BIR
Examiner Ben Garcia, however, was fully convinced that the
petitioner had filed a fraudulent income tax return so that he
submitted a "Fraud Referral Report," to the Tax Fraud Unit of
the BIR. Consequently, the Special Investigation Division of the
BIR found sufficient proof that the herein petitioner is guilty of
tax evasion for the taxable year 1973 and recommended his
prosecution. Ungab filed a motion to quash the informations on
the ground that his pending protest with the CIR has not yet
been acted upon hence the assessment is not yet final and
executory and therefore the trial court has no jurisdiction yet
over the criminal cases.
ISSUE: Whether or not the contention of Ungab is correct N
RULING: Criminal Procedure; Taxation; National Internal
Revenue Code; Preliminary investigation; Authority of State
Prosecutor to investigate and prosecute violations of the
National Internal Revenue Code independently of the City
Fiscal; Case at bar.The respondent State Prosecutor, although
believing that he can proceed independently of the City Fiscal in
the investigation and prosecution of these cases, first sought
permission from the City Fiscal of Davao City before he started
the preliminary investigation of these cases, and the City Fiscal,
after being shown Administrative Order No. 116, dated
December 5, 1974, designating the said State Prosecutor to assist
all Provincial and City fiscals throughout the Philippines in the
investigation and prosecution of all violations of the National
Internal Revenue Code, as amended, and other related laws,
graciously allowed the respondent State Prosecutor to conduct
the investigation of said cases, and in fact, said investigation
was conducted in the office of the City Fiscal.

Same; Same; Same; Jurisdiction of the Court of First Instance

over criminal prosecution for violations of the National Internal
Revenue Code; Computation and assessment of deficiency taxes
is not a pre-requisite for criminal prosecution under the Code.
What is involved here is not the collection of taxes where the
assessment of the Commissioner of Internal Revenue may be
reviewed by the Court of Tax Appeals, but a criminal prosecution
for violations of the National Internal Revenue Code which is
within the recognizance of Courts of First Instance. While there
can be no civil action to enforce collection before the assessment
procedures provided in the Code have been followed, there is no
requirement for the precise computation and assessment of the
tax before there can be a criminal prosecution under the Code.
Same; Same; Same; Prescription; Petition for reconsideration of
assessment of deficiency taxes suspends the prescriptive period
for the collection of taxes, not the prescriptive period of a
criminal action for violation of law.Besides, it has been ruled
that a petition for reconsideration of an assessment may affect
the suspension of the prescriptive period for the collection of
taxes, but not the prescriptive period of a criminal action for
violation of law. Obviously, the protest of the petitioner against
the assessment of the District Revenue Officer cannot stop his
prosecution for violation of the National Internal Revenue Code.
Accordingly, the respondent Judge did not abuse his discretion in
denying the motion to quash filed by the petitioner. [Ungab vs.
Cusi, Jr., 97 SCRA 877(1980)]

CIR VS. COURT OF APPEALS (1996)

FACTS: The CIR assessed Fortune Tobacco Corp for 7.6 Billion
Pesos representing deficiency income, ad valorem and valueadded taxes for the year 1992 to which Fortune moved for
reconsideration of the assessments. Later, the CIR filed a
complaint with the Department of Justice against the
respondent Fortune, its corporate officers, nine (9) other
corporations and their respective corporate officers for alleged
fraudulent tax evasion for supposed non-payment by Fortune of
the correct amount of taxes, alleging among others the fraudulent
scheme of making simulated sales to fictitious buyers declaring
lower wholesale prices, as allegedly shown by the great disparity
on the declared wholesale prices registered in the "Daily
Manufacturer's Sworn Statements" submitted by the respondents
to the BIR. Such documents when requested by the court were
not however presented by the BIR, prompting the trial court to
grant the prayer for preliminary injuction sought by the
respondent upon the reason that tax liabiliity must be duly
proven before any criminal prosecution be had. The petitioner
relying on the Ungab Doctrine sought the lifting of the writ of
preliminary mandatory injuction issued by the trial court.
ISSUE: Whose contention is correct?
RULING: Actions; Certiorari; Words and Phrases; Grave
Abuse of Discretion, Defined.In resolving the issue raised in
the petition, the Court may be guided by its definition of what
constitutes grave abuse of discretion. By grave abuse of
discretion is meant such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction. The abuse of
discretion must be patent and gross as to amount to an evasion
of positive duty or a virtual refusal to perform a duty enjoined by
law, or to act at all in contemplation of law as where the power
is exercised in an arbitrary and despotic manner by reason of
passion and hostility.
Taxation; Ad Valorem Taxes; Cigarettes; It is significant to note
that among the goods subject to ad valorem tax, the law
specifically Section 142(c) of the Tax Coderequires that the
corresponding tax on cigarettes shall be levied, assessed and
collected at the rates based on the manufacturers registered
wholesale price.There can be no question that under Section
127(b), the ad valorem tax should be based on the correct price
excluding the value-added tax, at which goods are sold at
wholesale in the place of production. It is significant to note
that among the goods subject to ad valorem tax, the law
specifically Section 142(c)requires that the corresponding tax
on cigarettes shall be levied, assessed and collected at the rates
based on the manufacturers registered wholesale price. Why

does the wholesale price need to be registered and what is the

purpose of the registration? The reason is self-evident, which is
to ensure the payment of the correct taxes by the manufacturers
of cigarettes through close supervision, monitoring and checking
of the business operations of the cigarette companies. As pointed
out by private respondents, no industry is as intensely supervised
by the BIR and also by the National Tobacco Administration
(NTA). Thus, the purchase and use of raw materials are subject
to prior authorization and approval by the NTA. Importations
of bobbins or cigarette paper, the manufacture, sale, and
utilization of the same, are subject to BIR supervision and
approval.
Same; Same; Same; Tax Evasion; If every step in the production
of cigarettes was closely monitored and supervised by the BIR
personnel specifically assigned to the manufacturers premises,
and considering that the Manufacturers Sworn Declarations on
the data required to be submitted were scrutinized and verified
by the BIR and, further, since the manufacturers wholesale
price was duly approved by the BIR, in such case, and in the
absence of contrary evidence, it was precipitate and premature to
conclude that the manufacturer made fraudulent returns or
wilfully attempted to evade payment of taxes due.Now, if
every step in the production of cigarettes was closely monitored
and supervised by the BIR personnel specifically assigned to
Fortunes premises, and considering that the Manufacturers
Sworn Declarations on the data required to be submitted by the
manufacturer were scrutinized and verified by the BIR and,
further, since the manufacturers wholesale price was duly
approved by the BIR, then it is presumed that such registered
wholesale price is the same as, or approximates the price,
excluding the value-added tax, at which the goods are sold at
wholesale in the place of production, otherwise, the BIR would
not have approved the registered wholesale price of the goods for
purposes of imposing the ad valorem tax due. In such case, and in
the absence of contrary evidence, it was precipitate and
premature to conclude that private respondents made fraudulent
returns or wilfully attempted to evade payment of taxes due.
Same; Same; Same; Same; Words and Phrases; Willful and
Fraud, Defined.Wilful means premeditated; malicious;
done with intent, or with bad motive or purpose, or with
indifference to the natural consequence x x x. Fraud in its
general sense, is deemed to comprise anything calculated to
deceive, including all acts, omissions, and concealment involving
a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an
undue and unconscionable advantage taken of another.

Same; Same; Same; Same; Fraud cannot be presumed.Fraud

cannot be presumed. If there was fraud or wilful attempt to
evade payment of ad valorem taxes by private respondents
through the manipulation of the registered wholesale price of the
cigarettes, it must have been with the connivance or cooperation
of certain BIR officials and employees who supervised and
monitored Fortunes production activities to see to it that the
correct taxes were paid. But there is no allegation, much less
evidence, of BIR personnels malfeasance. In the very least, there
is the presumption that the BIR personnel performed their duties
in the regular course in ensuing that the correct taxes were paid
by Fortune.
Same; Same; Same; Same; Before one is prosecuted for wilful
attempt to evade or defeat any tax under Sections 253 and 255
of the Tax Code, the fact that a tax is due must first be
proved.We share with the view of both the trial court and
Court of Appeals that before the tax liabilities of Fortune are
first finally determined, it cannot be correctly asserted that
private respondents have wilfully attempted to evade or defeat
the taxes sought to be collected from Fortune. In plain words,
before one is prosecuted for wilful attempt to evade or defeat any
tax under Sections 253 and 255 of the Tax Code, the fact that a
tax is due must first be proved.
Same; Same; Same; Same; Instant case distinguished from
Ungab v. Cusi, 97 SCRA 877 (1980).Reading Ungab
carefully, the pronouncement therein that deficiency assessment
is not necessary prior to prosecution is pointedly and deliberately
qualified by the Court with following statement quoted from
Guzik v. U.S.: The crime is complete when the violator has
knowingly and wilfully filed a fraudulent return with intent to
evade and defeat a part or all of the tax. In plain words, for
criminal prosecution to proceed before assessment, there must be
a prima facie showing of a wilful attempt to evade taxes. There
was a wilful attempt to evade tax in Ungab because of the
taxpayers failure to declare in his income tax return his income
derived from banana sapplings. In the mind of the trial court
and the Court of Appeals, Fortunes situation is quite apart
factually since the registered wholesale price of the goods,
approved by the BIR, is presumed to be the actual wholesale
price, therefore, not fraudulent and unless and until the BIR has
made a final determination of what is supposed to be the correct
taxes, the taxpayer should not be placed in the crucible of
criminal prosecution. Herein lies a whale of difference between
Ungab and the case at bar.
Criminal Procedure; Preliminary Investigation; Exceptions to the
general rule that criminal prosecutions cannot be enjoined.As
a general rule, criminal prosecutions cannot be enjoined.
However, there are recognized exceptions which, as summarized

in Brocka v. Enrile are: a. To afford adequate protection to the

constitutional rights of the accused (Hernandez vs. Albano, et
al., L-19272, January 25, 1967, 19 SCRA 95); b. When
necessary for the orderly administration of justice or to avoid
oppression or multiplicity of actions (Dimayuga, et al. vs.
Fernandez, 43 Phil. 304; Hernandez vs. Albano, supra; Fortun
vs. Labang, et al., L-38383, May 27, 1981, 104 SCRA 607); c.
When there is a prejudicial question which is sub judice (De Leon
vs. Mabanag, 70 Phil. 202); d. When the acts of the officer are
without or in excess of authority (Planas vs. Gil, 67 Phil. 62); e.
Where the prosecution is under an invalid law, ordinance or
regulation (Young vs. Rafferty, 33 Phil. 556; Yu Cong Eng vs.
Trinidad, 47 Phil. 385, 389); f. When double jeopardy is clearly
apparent (Sangalang vs. People and Alvendia, 109 Phil. 1140);
g. Where the court had no jurisdiction over the offense (Lopez
vs. City Judge, L-25795, October 29, 1966, 18 SCRA 616); h.
Where it is a case of persecution rather than prosecution (Rustia
vs. Ocampo, CA-G.R. No. 4760, March 25, 1960); i. Where the
charges are manifestly false and motivated by the lust for
vengeance (Recto vs. Castelo, 18 L.J. [1953], cited in Raoa vs.
Alvendia, CA-G.R. No. 30720-R, October 8, 1962; Cf.
Guingona, et al. vs. City Fiscal, L-60033, April 4, 1984, 128
SCRA 577); and j. When there is clearly no prima facie case
against the accused and a motion to quash on that ground has
been denied (Salonga vs. Pao, et al., L-59524, February 18,
1985, 134 SCRA 438).
Same; Same; Same; Preliminary investigation may be enjoined
where exceptional circumstances warrant.Contrary to
petitioners submission, preliminary investigation may be
enjoined where exceptional circumstances so warrant. In
Hernandez v. Albano and Fortun v. Labang, injunction was
issued to enjoin a preliminary investigation. In the case at bar,
private respondents filed a motion to dismiss the complaint
against them before the prosecution and alternatively, to suspend
the preliminary investigation on the grounds cited hereinbefore,
one of which is that the complaint of the Commissioner is not
supported by any evidence to serve as adequate basis for the
issuance of the subpoena to them and put them to their defense.
Indeed, the purpose of a preliminary injunction is to secure the
innocent against hasty, malicious and oppressive prosecution and
to protect him from an open and public accusation of crime, from
the trouble, expense and anxiety of a public trial and also to
protect the state from useless and expensive trials.
Actions; Certiorari; Pleadings and Practice; Certiorari will not be
issued to cure errors in proceedings or correct erroneous
conclusions of law or factas long as a court acts within its
jurisdiction, any alleged errors committed in the exercise of its
jurisdiction will amount to nothing more than errors of judgment

which are reviewable by timely appeal and not by a special civil

action of certiorari.We believe that the trial court in issuing
its questioned orders, which are interlocutory in nature,
committed no grave abuse of discretion amounting to lack of
jurisdiction. There are factual and legal bases for the assailed
orders. On the other hand, the burden is upon the petitioners to
demonstrate that the questioned orders constitute a whimsical
and capricious exercise of judgment, which they have not. For
certiorari will not be issued to cure errors in proceedings or
correct erroneous conclusions of law or fact. As long as a court
acts within its jurisdiction, any alleged errors committed in the
exercise of its jurisdiction will amount to nothing more than
errors of judgment which are reviewable by timely appeal and not
by a special civil action of certiorari. Consequently, the Regional
Trial Court acted correctly and judiciously, and as demanded by
the facts and the law, in issuing the orders granting the writs of
preliminary injunction, in denying petitioners motion to dismiss
and in admitting the supplemental petitions. What petitioners
should have done was to file an answer to the petition filed in
the trial court, proceed to the hearing and appeal the decision of
the court if adverse to them.
BELLOSILLO, J., Concurring and Dissenting:
Due Process; Preliminary Injunction; Pleadings and Practice;
The dismissal of the main case as a result of a mere incident
relative to the issuance of an ancillary writ is procedurally
awkward and violates due process.If grave abuse of discretion
attended the issuance of the writ of preliminary injunction, then
by all means nullify the abusive actbut only that. The main
case should be allowed to proceed according to due process. The
trial court should receive the evidence from the contending
parties, weigh and evaluate the same and then make its findings.
Clearly, the dismissal of the main case as a result of a mere
incident relative to the issuance of an ancillary writ is
procedurally awkward and violates due process, as it deprives
private respondents of their right to present their case in court
and support it with its evidence.

Taxation; While taxes are the lifeblood of the government, the

power to tax has its limits, inspite of all its plenitude.In
resolving the fundamental issue at hand, i.e., whether the trial
court committed grave abuse of discretion in issuing the subject
writs of preliminary injunction, we cannot avoid balancing on
the scales the power of the State to tax and its inherent right to
prosecute perceived transgressors of the law on one side, and the
constitutional rights of a citizen to due process of law and the
equal protection of the laws on the other. Obviously the scales
must tilt in favor of the individual, for a citizens right is amply

protected by the Bill of Rights of the Constitution. Thus while

taxes are the lifeblood of the government, the power to tax has
its limits, inspite of all its plenitude. Hence in Commissioner of
Internal Revenue v. Algue, Inc., we saidTaxes are the
lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should
be accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
Courts; Judicial Statesmanship; In days of great pressure, it is
alluring to take short cuts by borrowing dictatorial techniques,
but when courts do, they set in motion an arbitrary or subversive
influence by their own design which destroys them from
within.Finally, courts indeed should not hesitate to invoke
the constitutional guarantees to give adequate protection to the
citizens when faced with the enormous powers of the State, even
when what is in issue are only provisional remedies, as in the
case at hand. In days of great pressure, it is alluring to take short
cuts by borrowing dictatorial techniques. But when we do, we
set in motion an arbitrary or subversive influence by our own
design which destroys us from within. Let not the present case
dangerously sway towards that trend.
PADILLA, J., Dissenting:
Criminal Procedure; Preliminary Investigation; Prosecutors; The
decision of the majority clearly constitutes an untenable
usurpation of the primary duty and function of the prosecutors
to conduct the preliminary investigation of a criminal offense
and the power of the Secretary of Justice to review the resolution
of said prosecutors.The rule is settled that the fiscal
(prosecutor) cannot be prohibited from conducting and finishing
his preliminary investigation. The private respondents petition
before the trial court in this case was clearly premature since the
case did not fall within any of the exceptions when prohibition
lies to stop a preliminary investigation. The decision of the
majority in this case clearly constitutes an untenable usurpation
of the primary duty and function of the prosecutors to conduct
the preliminary investigation of a criminal offense and the power
of the Secretary of Justice to review the resolution of said
prosecutors.
Same; Taxation; Tax Evasion; The lack of a final determination
of a manufacturers exact or correct tax liability is not a bar to
criminal prosecution for fraudulent tax evasion.The lack of a
final determination of respondent Fortunes exact or correct tax
liability is not a bar to criminal prosecution for fraudulent tax
evasion. While a precise computation and assessment is required

for a civil action to collect a tax deficiency, the National

Internal Revenue Code does not require such computation and
assessment prior to criminal prosecution for fraudulent tax
evasion. Thus, as this Court had earlier ruledAn assessment
of a deficiency is not necessary to a criminal prosecution for
willful attempt to defeat and evade the income tax. A crime is
complete when the violator has knowingly and willfully filed a
fraudulent return with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon knowledge on the
part of the taxpayer that he has made an inaccurate return, and
the governments failure to discover the error and promptly to
assess has no connections with the commission of the crime. It
follows that, under the Ungab doctrine, the filing of a criminal
complaint for fraudulent tax evasion would be proper even
without a previous assessment of the correct tax.
Same; Same; Same; Estoppel; It is hornbook law that the
Government is not bound or estopped by the mistakes,
inadvertence, and what more, connivance of its officials and
employees with fraudulent schemes to defraud the
Government.In fine, even if BIR officials may have verified
Fortunes BIR registered wholesale price for its products, the
same does not estop or preclude the Government from filing
criminal complaints for fraudulent tax evasion based on evidence
subsequently gathered to the effect that such BIR registered
wholesale prices were a misdeclaration or underdeclaration of the
actual wholesale price. It is hornbook law that the Government
is not bound or estopped by the mistakes, inadvertence, and what
more, connivance of its officials and employees with fraudulent
schemes to defraud the Government. [Commissioner on Internal
Revenue vs. Court of Appeals, 257 SCRA 200(1996)]

CIR VS METROSTAR
FACTS: In January 2001, a revenue officer was authorized to
examine the books of accounts of Metro Star Superama, Inc. In
April 2002, after the audit review, the revenue district officer
issued a formal assessment notice against Metro Star advising
the latter that it is liable to pay P292,874.16 in deficiency taxes.
Metro Star assailed the issuance of the formal assessment notice
as it averred that due process was not observed when it was not
issued a pre-assessment notice. Nevertheless, the Commissioner of
Internal Revenue authorized the issuance of a Warrant of
Distraint and/or Levy against the properties of Metro Star.
Metro Star then appealed to the Court of Tax Appeals (CTA
Case No. 7169). The CTA ruled in favor of Metro Star.
ISSUE: Whether or not due process was observed in the issuance
of the formal assessment notice against Metro Star. N
RULING: Taxation; Court of Tax Appeals; Appeals; Court will
not lightly set aside the conclusions reached by the Court of Tax
Appeals (CTA) which by the very nature of its functions has
accordingly developed an exclusive expertise on the resolution
unless there has been an abuse or improvident exercise of
authority.The general rule is that the Court will not lightly set
aside the conclusions reached by the CTA which, by the very
nature of its functions, has accordingly developed an exclusive
expertise on the resolution unless there has been an abuse or
improvident exercise of authority. In Barcelon, Roxas Securities,
Inc. (now known as UBP Securities, Inc.) v. Commissioner of
Internal Revenue, the Court wrote: Jurisprudence has
consistently shown that this Court accords the findings of fact
by the CTA with the highest respect. In Sea-Land Service Inc. v.
Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA
441, 445-446], this Court recognizes that the Court of Tax
Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will
not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or there
is a showing of gross error or abuse on the part of the Tax Court.
In the absence of any clear and convincing proof to the contrary,
this Court must presume that the CTA rendered a decision which
is valid in every respect.
Same; Assessment; If the taxpayer denies ever having received
an assessment from the Bureau of Internal Revenue (BIR), it is
incumbent upon the latter to prove by competent evidence that
such notice was indeed received by the addressee.Jurisprudence

is replete with cases holding that if the taxpayer denies ever

having received an assessment from the BIR, it is incumbent
upon the latter to prove by competent evidence that such notice
was indeed received by the addressee. The onus probandi was
shifted to respondent to prove by contrary evidence that the
Petitioner received the assessment in the due course of mail. The
Supreme Court has consistently held that while a mailed letter is
deemed received by the addressee in the course of mail, this is
merely a disputable presumption subject to controversion and a
direct denial thereof shifts the burden to the party favored by the
presumption to prove that the mailed letter was indeed received
by the addressee (Republic vs. Court of Appeals, 149 SCRA 351).
Same; Same; Section 228 of the Tax Code clearly requires that the
taxpayer must be informed that he is liable for deficiency taxes
through the sending of a Preliminary Assessment Notice
(PAN).Section 228 of the Tax Code clearly requires that the
taxpayer must first be informed that he is liable for deficiency
taxes through the sending of a PAN. He must be informed of the
facts and the law upon which the assessment is made. The law
imposes a substantive, not merely a formal, requirement. To
proceed heedlessly with tax collection without first establishing a
valid assessment is evidently violative of the cardinal principle in
administrative investigations that taxpayers should be able to
present their case and adduce supporting evidence.
Same; Same; The sending of a Preliminary Assessment Notice
(PAN) to taxpayer to inform him of the assessment made is but
part of the due process requirement in the issuance of a deficiency
tax assessment, the absence of which senders nugatory any
assessment made by the tax authorities.It is clear that the
sending of a PAN to taxpayer to inform him of the assessment
made is but part of the due process requirement in the issuance
of a deficiency tax assessment, the absence of which renders
nugatory any assessment made by the tax authorities. The use of
the word shall in subsection 3.1.2 describes the mandatory
nature of the service of a PAN. The persuasiveness of the right to
due process reaches both substantial and procedural rights and
the failure of the CIR to strictly comply with the requirements
laid down by law and its own rules is a denial of Metro Stars
right to due process. Thus, for its failure to send the PAN stating
the facts and the law on which the assessment was made as
required by Section 228 of R.A. No. 8424, the assessment made
by the CIR is void.
Same; Same; While taxes are the lifeblood of the government, the
power to tax has its limits in spite of all its plenitude.It is an
elementary rule enshrined in the 1987 Constitution that no
person shall be deprived of property without due process of law.
In balancing the scales between the power of the State to tax
and its inherent right to prosecute perceived transgressors of the

law on one side, and the constitutional rights of a citizen to due

process of law and the equal protection of the laws on the other,
the scales must tilt in favor of the individual, for a citizens right
is amply protected by the Bill of Rights under the Constitution.
Thus, while taxes are the lifeblood of the government, the
power to tax has its limits, in spite of all its plenitude.
[Commissioner of Internal Revenue vs. Metro Star Superama
Inc., 637 SCRA 633(2010)]

CIR VS AZUCENA REYES

FACTS: In 1993, Maria Tancino died leaving behind an estate
worth P32 million. In 1997, a tax audit was conducted on the
estate. Meanwhile, the National Internal Revenue Code (NIRC)
of 1997 was passed. Eventually in 1998, the estate was issued a
final assessment notice (FAN) demanding the estate to pay
P14.9 million in taxes inclusive of surcharge and interest; the
estates liability was based on Section 229 of the [old] Tax Code.
Azucena Reyes, one of the heirs, protested the FAN. The
Commissioner of Internal Revenue (CIR) nevertheless issued a
warrant of distraint and/or levy. Reyes again protested the
warrant but in March 1999, she offered a compromise and was
willing to pay P1 million in taxes. Her offer was denied. She
continued to work on another compromise but was eventually
denied. The case reached the Court of Tax Appeals where Reyes
was also denied. In the Court of Appeals, Reyes received a
favorable judgment.

an assessment is protested. The provision does not create new or

take away vested rights. In both instances, it can surely be
applied retroactively. Moreover, RA 8424 does not state, either
expressly or by necessary implication, that pending actions are
excepted from the operation of Section 228, or that applying it to
pending proceedings would impair vested rights.
Same; Same; Same; Same; A tax regulation is promulgated by the
finance secretary to implement the provisions of the Tax Code;
The absence of the regulation does not automatically mean that
the law itself would become inoperative.The non-retroactive
application of Revenue Regulation (RR) No. 12-99 is of no
moment, considering that it merely implements the law. A tax
regulation is promulgated by the finance secretary to implement
the provisions of the Tax Code. While it is desirable for the
government authority or administrative agency to have one
immediately issued after a law is passed, the absence of the
regulation does not automatically mean that the law itself would
become inoperative.

ISSUE: Whether or not the formal assessment notice is valid. N

Taxation; Assessment; Taxpayers shall be informed in writing of
the law and the facts on which the assessment is made,
otherwise, the assessment shall be void.The second paragraph
of Section 228 of the Tax Code is clear and mandatory. It
provides as follows: Sec. 228. Protesting of Assessment.x x x
x x x x x x The taxpayers shall be informed in writing of the law
and the facts on which the assessment is made: otherwise, the
assessment shall be void.
Same; Same; The old requirement of merely notifying the
taxpayer of the CIRs findings was changed in 1998 to informing
the taxpayer of not only the law but also of the facts on which
an assessment would be made.RA 8424 has already amended
the provision of Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the CIRs
findings was changed in 1998 to informing the taxpayer of not
only the law, but also of the facts on which an assessment would
be made; otherwise, the assessment itself would be invalid.
Same; Same; Statutes; Statutory Construction; Statutes that are
remedial, or that do not create new or take away vested rights,
do not fall under the general rule against the retroactive
operation of statutes; RA 8424 does not state, either expressly or
by necessary implication, that pending actions are excepted from
the operation of Section 228, or that applying it to pending
proceedings would impair vested rights.The general rule is that
statutes are prospective. However, statutes that are remedial, or
that do not create new or take away vested rights, do not fall
under the general rule against the retroactive operation of
statutes. Clearly, Section 228 provides for the procedure in case

Same; Same; Same; Same; An administrative rule interpretive of

a statute and not declarative of certain rights and corresponding
obligations, is given retroactive effect as of the date of the
effectivity of the statute.An administrative rule interpretive
of a statute, and not declarative of certain rights and
corresponding obligations, is given retroactive effect as of the
date of the effectivity of the statute. RR 12-99 is one such rule.
Being interpretive of the provisions of the Tax Code, even if it
was issued only on September 6, 1999, this regulation was to
retroact to January 1, 1998a date prior to the issuance of the
preliminary assessment notice and demand letter.
Same; Same; Same; Same; In case of discrepancy between the law
as amended and its implementing but old regulation, the former
necessarily prevails; Between Section 228 of the Tax Code and
the pertinent provisions of RR 12-85, the latter cannot stand
because it cannot go beyond the provision of the law.Section
228 has replaced Section 229. The provision on protesting an
assessment has been amended. Furthermore, in case of
discrepancy between the law as amended and its implementing
but old regulation, the former necessarily prevails. Thus, between
Section 228 of the Tax Code and the pertinent provisions of RR
12-85, the latter cannot stand because it cannot go beyond the
provision of the law. The law must still be followed, even though
the existing tax regulation at that time provided for a different
procedure. The regulation then simply provided that notice be
sent to the respondent in the form prescribed, and that no
consequence would ensue for failure to comply with that form.
Same; Same; To proceed heedlessly with tax collection without
first establishing a valid assessment is evidently violative of the

cardinal principle in administrative investigations: that

taxpayers should be able to present their case and adduce
supporting evidence.The law imposes a substantive, not merely
a formal, requirement. To proceed heedlessly with tax collection
without first establishing a valid assessment is evidently
violative of the cardinal principle in administrative
investigations: that taxpayers should be able to present their case
and adduce supporting evidence. In the instant case, respondent
has not been informed of the basis of the estate tax liability.
Without complying with the unequivocal mandate of first
informing the taxpayer of the governments claim, there can be
no deprivation of property, because no effective protest can be
made. The haphazard shot at slapping an assessment, supposedly
based on estate taxations general provisions that are expected to
be known by the taxpayer, is utter chicanery.
Same; Same; Although taxes are the lifeblood of the government,
their assessment and collection should be made in accordance
with law as any arbitrariness will negate the very reason for
government itself.Even a cursory review of the preliminary
assessment notice, as well as the demand letter sent, reveals the
lack of basis fornot to mention the insufficiency ofthe gross
figures and details of the itemized deductions indicated in the
notice and the letter. This Court cannot countenance an
assessment based on estimates that appear to have been
arbitrarily or capriciously arrived at. Although taxes are the
lifeblood of the government, their assessment and collection
should be made in accordance with law as any arbitrariness will
negate the very reason for government itself.
Same; Same; Failure to comply with Section 228 does not only
render the assessment void, but also finds no validation in any
provision in the Tax Code.Tax laws are civil in nature. Under
our Civil Code, acts executed against the mandatory provisions of
law are void, except when the law itself authorizes the validity
of those acts. Failure to comply with Section 228 does not only
render the assessment void, but also finds no validation in any
provision in the Tax Code. We cannot condone errant or
enterprising tax officials, as they are expected to be vigilant and
law-abiding. [Commissioner of Internal Revenue vs. Reyes, 480
SCRA 382(2006)]